Background

We intensified our engagement with KEPCO shortly after the 2011 Fukushima nuclear disaster. While the damaged nuclear power stations were limited to those of Tokyo Electric Power at Fukushima, the operations of all nuclear power stations in Japan were halted after the disaster. Japan’s Nuclear Regulation Authority introduced new re-starting standards to reflect the lessons learned from the disaster. At the time, nuclear power made up approximately half of KEPCO’s production, which is why we urged the company to come up with alternative business strategies.

During our conversations, we also challenged the governance of the company. In particular, we found the size of the board too large. Although the number has been decreasing, still 19 board members were elected at the company’s 2011 AGM. We also had concerns about the lack of independent directors on its board.

Our engagement

We held several discussions with the company, including at its offices in Osaka. We realised that it would only return to profitability if it was allowed to resume operating its nuclear plants. We suggested that the company assess the safety of operations in each of its plants carefully due to much stricter government oversight.

However, our main engagement efforts concerned its board. We explained why we aim for smaller boards than what is usually the case in Japan, ideally with a third of the directors being independent. At the 2017 AGM, although the independent director candidates met the criteria set by the Tokyo Stock Exchange, we recommended voting against one director whose tenure exceeded our preferred length of nine years and against another as he is an affiliate because of his position as a special adviser and ex-chair of one of the company’s leading banks, with a substantial amount of shares cross-held by the two companies.

Changes at the company

The company has gradually reduced the size of its board, which today has only 14 members. It has also introduced a nomination and remuneration advisory committee, which signals an improvement in its accountability although the committee does not have the same status as in other countries.

In 2017, the company was able to restart some of its nuclear power plants and return to profitability. Encouragingly, it aims for a five-fold increase in its production capacity of renewable energy by 2030 to reach 500MW and now produces a detailed corporate social responsibility report. It also started to disclose its climate change-related data to the CDP initiative in 2017, in line with our recommendations to do that.

We continue to engage with the company on the benefits of reducing its cross-shareholdings in other companies, as well as on the diversity of its board.

- Frédéric Bach and Masaru Arai – 12 January 2018

Our engagementWe held several discussions with the company, including at its offices in Osaka. We realised that it would only return to profitability if it was allowed to resume operating its nuclear plants. We suggested that the company assess the safety of operations in each of its plants carefully due to much stricter government oversight.

However, our main engagement efforts concerned its board. We explained why we aim for smaller boards than what is usually the case in Japan, ideally with a third of the directors being independent. At the 2017 AGM, although the independent director candidates met the criteria set by the Tokyo Stock Exchange, we recommended voting against one director whose tenure exceeded our preferred length of nine years and against another as he is an affiliate because of his position as a special adviser and ex-chair of one of the company’s leading banks, with a substantial amount of shares cross-held by the two companies.

Changes at the companyThe company has gradually reduced the size of its board, which today has only 14 members. It has also introduced a nomination and remuneration advisory committee, which signals an improvement in its accountability although the committee does not have the same status as in other countries.

In 2017, the company was able to restart some of its nuclear power plants and return to profitability. Encouragingly, it aims for a five-fold increase in its production capacity of renewable energy by 2030 to reach 500MW and now produces a detailed corporate social responsibility report. It also started to disclose its climate change-related data to the CDP initiative in 2017, in line with our recommendations to do that.

We continue to engage with the company on the benefits of reducing its cross-shareholdings in other companies, as well as on the diversity of its board.